US refiners process record volume of crude as demand climbs
London (Reuters)—US oil refineries are processing record volumes of crude, but stocks of refined fuels remain well contained thanks to strong exports and demand at home.
US refineries processed 17.5 MMbpd of crude in the week ending on May 26, according to the US Energy Information Administration (EIA). Throughput was more than 1.2 MMbpd higher than at the same point in 2016, and 2.2 MMbpd above the 10-yr seasonal average.
Record refinery runs have helped pull down US crude stocks by 31 MMbbl since the end of March, with inventories drawing down much faster and earlier in the year than normal.
However, despite fears that record processing would result in a buildup of unsold products, stocks of gasoline and diesel have generally moved in line with normal seasonal patterns.
Part of the explanation lies in the strength of exports, mostly to markets in Central America, South America and the Caribbean, where aging and inefficient refineries have struggled to meet growing demand from consumers.
US refineries are increasingly geared towards meeting demand from the rest of the hemisphere. US refiners and traders exported 640 Mbpd of gasoline in the week ending on May 26, and a near-record 1.25 MMbpd of distillate fuel oil.
US domestic fuel consumption is also now running at record or near-record levels, according to an analysis of EIA data. Gasoline supplied to domestic customers in the US hit a record 9.8 MMbpd last week, an increase of roughly 330 Mbpd compared with the same period in 2016.
Distillate supply averaged 4.1 MMbpd, significantly higher than in 2016, though still below the record set in 2007.
New methodology. Beginning August 2016, the EIA introduced a new and more accurate methodology for calculating exports and estimating weekly gasoline and diesel consumption ("Statistical methodology of estimating petroleum exports using data from U.S. Customs and Border Protection", EIA, August 2016).
The new methodology uses real-time information obtained from US Customs to estimate weekly exports, where the prior methodology relied on a two-month lagged model to derive estimated values, which in turn introduced a potential source of errors into estimates for domestic consumption.
So, estimates for consumption before and after August 2016 are not strictly comparable, but the older data can be corrected in retrospect using reliable monthly export data from the US Census Bureau.
The export-corrected time series show that consumption of both gasoline and distillate fuel oil has been running at a high level since March. The increase in gasoline and distillate demand is consistent with more comprehensive monthly data showing consumption of both rising strongly in March after being relatively weak in January and February.
Resilient margins. Strong fuel demand in export markets and at home explains why US refining margins have held up well despite the surge in processing rates. Refinery margins in most of the US have changed little during 2Q 2017 compared with the same period in 2016, despite much higher throughput.
According to the EIA, US refiners have added almost 500 Mbpd of atmospheric crude distillation capacity since the start of 2016. Building and expanding crude units is expensive, so once these units were commissioned there was a strong incentive to use them to start recovering the cost.
US refineries are generally more efficient than their rivals in Europe, and certainly more so than refineries in Latin America. US-based refiners also have lower transportation costs given their proximity to sources of crude from Texas, New Mexico and North Dakota, and by being closer to major fuel customers than rival suppliers in Europe and Asia. Thus, US refiners are well placed to capture market share from weaker and less flexible rivals in other parts of the Atlantic Basin.
With so much fuel entering the supply chain, there is some risk that either the domestic or export markets will become saturated. But the resilience of refining margins indicates that the risk is not thought to be high at the moment, and this is giving refiners a continued incentive running at record volumes.
(By John Kemp. Mr. Kemp is a Reuters market analyst, and the views expressed are his own)
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